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Collusion at the Extensive Margin

Martin Byford University of Colorado, Boulder Joshua Gans University of Melbourne

27th April, 2010

Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the intensive margin involves firms coordinating their strategic actions within the markets in which they come into contact.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the intensive margin involves firms coordinating their strategic actions within the markets in which they come into contact. Collusion at the extensive margin involves firms coordinating their participation across markets in order to avoid coming into contact.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the intensive margin involves firms coordinating their strategic actions within the markets in which they come into contact. Collusion at the extensive margin involves firms coordinating their participation across markets in order to avoid coming into contact. The two forms of collusion can be hard to distinguish where a market can be segmented (e.g., each discrete customer can be a ‘market’).
Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

In 2001, Australian Competition and Consumer Commission took Rural Press and Waikerie to the Federal Court of Australia alleging anti-competitive agreement, exclusionary conduct and abuse of market power.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

In 2001, Australian Competition and Consumer Commission took Rural Press and Waikerie to the Federal Court of Australia alleging anti-competitive agreement, exclusionary conduct and abuse of market power. Matter went all the way to the High Court of Australia with the anticompetitive agreement case upheld.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

In 2001, Australian Competition and Consumer Commission took Rural Press and Waikerie to the Federal Court of Australia alleging anti-competitive agreement, exclusionary conduct and abuse of market power. Matter went all the way to the High Court of Australia with the anticompetitive agreement case upheld. The basic story was one of collusion at the extensive margin.
Collusion at the Extensive Margin
Monday, 10 May 2010

Rural Press and Waikerie

Monday, 10 May 2010

Rural Press and Waikerie

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Rural Press and Waikerie

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Rural Press and Waikerie

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Initial Entry

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Initial Entry

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Introduction

The Threat
The attached copies of pages from The River News were sent to me last week. The Mannum advertising was again evident, which suggests your Waikerie operator, John Pick, is still not focussing on the traditional area of operations. I wanted to formally record my desire to reach an understanding with your family in terms of where each of us focuses our publishing efforts. If you continue to attack in Mannum, a prime readership area of the Murray Valley Standard, it may be we will have to look at expanding our operations into areas that we have not traditionally services [sic]. I thought I would write to you so there could be no misunderstanding our position. I will not bother you again on this subject.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Ian Law, Rural Press, 7 April 1998
Monday, 10 May 2010

Collusion at the Extensive Margin

The Threat

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The Threat

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The Response

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Introduction

Bell Atlantic v. Twombly

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bell Atlantic v. Twombly
Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bell Atlantic v. Twombly
Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement.”

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bell Atlantic v. Twombly
Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement.” However, the Baby Bells had been regulated to prevent such competition and so it was not surprising that ‘old habits’ continued.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bell Atlantic v. Twombly
Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement.” However, the Baby Bells had been regulated to prevent such competition and so it was not surprising that ‘old habits’ continued. It was argued that the plaintiffs would have to demonstrate that the Baby Bells were sacrificing profits by refraining from such entry.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bell Atlantic v. Twombly
Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement.” However, the Baby Bells had been regulated to prevent such competition and so it was not surprising that ‘old habits’ continued. It was argued that the plaintiffs would have to demonstrate that the Baby Bells were sacrificing profits by refraining from such entry. Further, “[T]here is no reason to infer that the companies had agreed among themselves to do what was only natural anyway; so natural, in fact, that if alleging parallel decisions to resist competition were enough to imply an antitrust conspiracy, pleading a §1 violation against almost any group of competing businesses would be a sure thing.”
Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin?

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin? How does the presence of multiple markets facilitate collusion?

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin? How does the presence of multiple markets facilitate collusion? Can different enforcement mechanisms generate different stability and performance outcomes?

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin? How does the presence of multiple markets facilitate collusion? Can different enforcement mechanisms generate different stability and performance outcomes? Where can collusion be detected?
Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that firms may employ temporary punishments to facilitate collusion in the presence of uncertainty.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that firms may employ temporary punishments to facilitate collusion in the presence of uncertainty. Bernheim and Whinston (1990) show that multi-market contact can facilitate collusion by pooling participation constraints.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that firms may employ temporary punishments to facilitate collusion in the presence of uncertainty. Bernheim and Whinston (1990) show that multi-market contact can facilitate collusion by pooling participation constraints. Edwards (1955): conglomerates have scope to engage in mutual forbearance.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that firms may employ temporary punishments to facilitate collusion in the presence of uncertainty. Bernheim and Whinston (1990) show that multi-market contact can facilitate collusion by pooling participation constraints. Edwards (1955): conglomerates have scope to engage in mutual forbearance. This paper: understand collusion across markets.

Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: firms should enter multiple markets to improve cartel stability.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: firms should enter multiple markets to improve cartel stability. Complication: requires some combination of non-identical firms, markets and non-constant returns to scale.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: firms should enter multiple markets to improve cartel stability. Complication: requires some combination of non-identical firms, markets and non-constant returns to scale. That is, multi-market contact is irrelevant with identical firms, markets and constant returns to scale.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: firms should enter multiple markets to improve cartel stability. Complication: requires some combination of non-identical firms, markets and non-constant returns to scale. That is, multi-market contact is irrelevant with identical firms, markets and constant returns to scale. Did not consider the possibility that collusion might involve market forbearance.
Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Outline

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Outline
Basic model set-up: multi-contest environment Use Markov Perfect Equilibrium Add ‘observable friction’ to entry/exit decision for simple history dependence

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Outline
Basic model set-up: multi-contest environment Use Markov Perfect Equilibrium Add ‘observable friction’ to entry/exit decision for simple history dependence Results Competitive equilibrium Collusive equilibrium Multi-lateral enforcement Proportionate Response Key Feature: punishment not costly Uncertainty over state Proportionate Response higher expected return than other enforcement mechanisms Policy implications for detection of collusive behaviour
Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Primitives

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Primitives
A set I = {1,…, I} of firms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Primitives
A set I = {1,…, I} of firms. A set N = {1,…, N} of distinct markets or separable market segments.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Primitives
A set I = {1,…, I} of firms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic profit to a firm in a market with m participants: π*(m).

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Primitives
A set I = {1,…, I} of firms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic profit to a firm in a market with m participants: π*(m). Infinite number of periods.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Primitives
A set I = {1,…, I} of firms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic profit to a firm in a market with m participants: π*(m). Infinite number of periods. All firms have identical discount factor, δ.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Primitives
A set I = {1,…, I} of firms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic profit to a firm in a market with m participants: π*(m). Infinite number of periods. All firms have identical discount factor, δ. Note: In paper, markets and firms can be heterogeneous.
Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Basics

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Basics

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Each market is modelled as a repeated simultaneous moves noncooperative game.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Basics

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Each market is modelled as a repeated simultaneous moves noncooperative game. Assumption 1: In a one shot game each market produces a unique (expected) equilibrium payoff vector for each profile of participation.

Collusion at the Extensive Margin
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Timing

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Timing

Period t

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Timing

Transition Stage

Period t

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Timing

Transition Stage

Period t

State Revealed

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Timing

Transition Stage

Market Stage

Period t

State Revealed

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Timing

Transition Stage

Market Stage Instantaneous Profits Realised

Period t

State Revealed

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage firm’s simultaneously select the subset of markets in which they wish to pursue a presence.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage firm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each firm’s participation in a market is represented by one of four states.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage firm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each firm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage firm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each firm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest. Entry: The player is in the process of entering the contest.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage firm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each firm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest. Entry: The player is in the process of entering the contest. Presence: The player is an active participant in the contest.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage firm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each firm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest. Entry: The player is in the process of entering the contest. Presence: The player is an active participant in the contest. Exit: The player is in the process of exiting the contest.

Conclusions

Collusion at the Extensive Margin

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Absence

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Absence

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Absence

Entry

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Absence

Entry

Presence

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Absence

Entry

Presence

Exit

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Absence

Entry

Presence

Exit

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Absence

Entry

Presence

Exit

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Absence

Entry

Presence

Exit

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Absence

Entry

Presence

Exit

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Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

A firm participates in every market in which it has a presence or is in the process of exiting.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

A firm participates in every market in which it has a presence or is in the process of exiting. Lemma 1: In a Markov perfect equilibrium (MPE) each firm takes its static Nash equilibrium action in the market stage, subject to the prevailing profile of participation.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

A firm participates in every market in which it has a presence or is in the process of exiting. Lemma 1: In a Markov perfect equilibrium (MPE) each firm takes its static Nash equilibrium action in the market stage, subject to the prevailing profile of participation. Initially we assume that markets are identical, separable and symmetric.
Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Instantaneous Profit Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Instantaneous Profit Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway profitable for a firm, holding the participation of the remaining firms constant.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Instantaneous Profit Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway profitable for a firm, holding the participation of the remaining firms constant. The MPE instantaneous profit π*(m) > 0 for all m ≤ I.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Instantaneous Profit Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway profitable for a firm, holding the participation of the remaining firms constant. The MPE instantaneous profit π*(m) > 0 for all m ≤ I. Proposition 1 (Competitive Equilibrium): Where assumptions 1 and 2 holds it is an MPE for all firms to enter and remain in every market.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Instantaneous Profit Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway profitable for a firm, holding the participation of the remaining firms constant. The MPE instantaneous profit π*(m) > 0 for all m ≤ I. Proposition 1 (Competitive Equilibrium): Where assumptions 1 and 2 holds it is an MPE for all firms to enter and remain in every market.
m MPE instantaneous profits satisfy π (m) > π ∗ (m + 1). m+1

Collusion at the Extensive Margin

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Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Where collusion takes place at the extensive margin a collusive agreement has two components:

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Where collusion takes place at the extensive margin a collusive agreement has two components: A partition Q of the set N of markets that either assigns a market to a firm or to a contested partition in which all firms participate. A collusive partition is characterised by the number of markets ni in each firm i’s component of the partition.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Where collusion takes place at the extensive margin a collusive agreement has two components: A partition Q of the set N of markets that either assigns a market to a firm or to a contested partition in which all firms participate. A collusive partition is characterised by the number of markets ni in each firm i’s component of the partition. An enforcement mechanism that utilises the threat of reciprocal entry to counter the expansion incentive.
Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Grim-Strategy Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

π (1) > I π (I )
* *

δ ≥δ

GS

* ⎡ ⎤ ∑ j ≠i n jπ (2) ⎥ = max i ⎢ * * * * ⎢ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥ ⎣ ⎦

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Grim-Strategy Equilibrium
Suppose that if one firm enters another firm’s market, all firms enter all markets forever.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

π (1) > I π (I )
* *

δ ≥δ

GS

* ⎡ ⎤ ∑ j ≠i n jπ (2) ⎥ = max i ⎢ * * * * ⎢ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥ ⎣ ⎦

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Grim-Strategy Equilibrium
Suppose that if one firm enters another firm’s market, all firms enter all markets forever. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I,

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

π (1) > I π (I )
* *

δ ≥δ

GS

* ⎡ ⎤ ∑ j ≠i n jπ (2) ⎥ = max i ⎢ * * * * ⎢ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥ ⎣ ⎦

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Does multi-market contact facilitate collusion more than multi-market avoidance?

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Does multi-market contact facilitate collusion more than multi-market avoidance? Bernheim-Whinston (1990): depends on firm/market asymmetries

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Does multi-market contact facilitate collusion more than multi-market avoidance? Bernheim-Whinston (1990): depends on firm/market asymmetries Here, when products are close substitutes, lower discount factors support collusion at the extensive margin than collusion at the intensive margin.
Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Targeted Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Targeted Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the extensive margin invites a richer set of enforcement mechanisms that are (a) temporary and (b) target infringers more directly.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Targeted Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the extensive margin invites a richer set of enforcement mechanisms that are (a) temporary and (b) target infringers more directly. When there is uncertainty, we can demonstrate that targeted enforcement is both more stable and more profitable. This provides a rationale for proportional response.
Collusion at the Extensive Margin
Monday, 10 May 2010

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Partitioning Contests
Firm 1 Firm 2

Contested

Firm 3

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Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium. If at least one firm is entering or present in another firm’s market, and at least one firm is not entering or present in every market, then all firms enter every market.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium. If at least one firm is entering or present in another firm’s market, and at least one firm is not entering or present in every market, then all firms enter every market. Otherwise all firms withdraw from every market belonging to a rival player.
Collusion at the Extensive Margin
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Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

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Initial Deviation (t = 1)
Firm 1 Firm 2

E Contested

Firm 3

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Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

P Contested

Firm 3

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Tit-for-Tat Response (t = 2)
Firm 1 E P E E Contested E E Firm 3 Firm 2

E

E E E

E
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E

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

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Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

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Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Withdrawal (t = 3)
Firm 1 w w w w Contested w w Firm 3 Firm 2

w

w w w

w
Monday, 10 May 2010

w

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 4π ∗ (3) 4π ∗ (3) 4π ∗ (3)

Gain in Period 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 4π ∗ (3) ￿ ∗ ￿ ∗ 2 π (1) − π (3) 4π ∗ (3) ￿ ∗ ￿ ∗ 2 π (1) − π (3) 4π ∗ (3) ￿ ∗ ￿ ∗ 2 π (1) − π (3)

Gain in Period 3

Loss in Period 3

Monday, 10 May 2010

Equilibrium Path (t > 3)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Introduction

Stability Conditions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to rival firms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to rival firms. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I,

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to rival firms. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I, ￿

j￿=i

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

nj π (2) + π (I) < ni π (1) − π (I) . ￿

∗ ￿ ￿

∗ ￿

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to rival firms. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I, ￿

j￿=i

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

nj π (2) + π (I) < ni π (1) − π (I) . nj π ∗ (2) j￿=i ￿ = max i∈I ni π ∗ (1) − nj π ∗ (I) j∈I ￿ ￿ ￿ ￿

∗ ￿ ￿

∗ ￿

δ ≥ δM L

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Identical Markets: Instantaneous profits in a market are insensitive to the market’s label.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Identical Markets: Instantaneous profits in a market are insensitive to the market’s label. Symmetry: Instantaneous profits in a market are insensitive to the identity of firms.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Identical Markets: Instantaneous profits in a market are insensitive to the market’s label. Symmetry: Instantaneous profits in a market are insensitive to the identity of firms. Separable Markets: Instantaneous profits in a market are independent of actions taken in any other market.
Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 1: In a one shot game each market produces a unique (expected) equilibrium payoff vector for each profile of participation.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 1: In a one shot game each market produces a unique (expected) equilibrium payoff vector for each profile of participation. Assumption 2 (Expansion Incentive): Entry into an additional market is alway profitable for a firm, holding the participation of the remaining firms constant.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

The heavy-handed enforcement mechanism treats each pair of firms independently.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

The heavy-handed enforcement mechanism treats each pair of firms independently. For each pair of firms {i, j}, if firm i is entering or present in at least one of firm j’s markets, and firms i and j are not entering or present in all of each others markets, then both firms enter all of each others markets.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

The heavy-handed enforcement mechanism treats each pair of firms independently. For each pair of firms {i, j}, if firm i is entering or present in at least one of firm j’s markets, and firms i and j are not entering or present in all of each others markets, then both firms enter all of each others markets. Otherwise firms i and j withdraw from every market belonging to the other player.
Collusion at the Extensive Margin
Monday, 10 May 2010

Monday, 10 May 2010

Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Initial Deviation (t = 1)
Firm 1 Firm 2

E Contested

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

P Contested

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

P E Contested E

E

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Withdrawal (t = 3)
Firm 1 Firm 2

w w Contested w

w

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 2π ∗ (2) 2π ∗ (2)

Gain in Period 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 2π ∗ (2) ￿ ∗ ￿ ∗ 2 π (1) − π (2) 2π ∗ (2) ￿ ∗ ￿ ∗ 2 π (1) − π (2)

Gain in Period 3

Loss in Period 3

Monday, 10 May 2010

Equilibrium Path (t > 3)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Introduction

Stability Conditions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i}, ￿
￿ 1 ￿ ∗ ∗ nj π (2) < ni π (1) − π (￿K￿ + 1) . 2

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i}, ￿
￿ 1 ￿ ∗ ∗ nj π (2) < ni π (1) − π (￿K￿ + 1) . 2

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

δ≥δ

HH

= max
i∈I ￿

K⊆I\{i}

max ￿

nj π (2) ￿ ￿ ￿ ni π ∗ (1) − π ∗ (￿K￿ + 1) − j∈K nj π ∗ (2)
j∈K ￿

∗ ￿￿

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

The heavy-handed enforcement mechanism treats each pair of firms independently as well as scaling punishments to the initial transgression.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

The heavy-handed enforcement mechanism treats each pair of firms independently as well as scaling punishments to the initial transgression. For each pair of firms {i, j}, if firm i is entering or present in at least one of firm j’s markets, and firms i and j are not entering or present in an equal number of each others markets, then the firm in the fewest of its rival’s contests enters additional contests sufficient to equalise cross participation.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

The heavy-handed enforcement mechanism treats each pair of firms independently as well as scaling punishments to the initial transgression. For each pair of firms {i, j}, if firm i is entering or present in at least one of firm j’s markets, and firms i and j are not entering or present in an equal number of each others markets, then the firm in the fewest of its rival’s contests enters additional contests sufficient to equalise cross participation. Otherwise firms i and j withdraw from every market belonging to the other player.

Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Monday, 10 May 2010

Initial Deviation (t = 1)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Initial Deviation (t = 1)
Firm 1 Firm 2

E Contested

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

P Contested

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2

P E Contested

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Withdrawal (t = 3)
Firm 1 Firm 2

w w Contested

Firm 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) π ∗ (2) π ∗ (2)

Gain in Period 3

Monday, 10 May 2010

Tit-for-Tat Response (t = 2)
Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) π ∗ (2) π ∗ (2)

Gain in Period 3

Loss in Period 3

π ∗ (1) − π ∗ (2)

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Equilibrium Path (t > 3)
Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Introduction

Stability Conditions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i}, ￿
￿ 1 ￿ ∗ ∗ nj π (2) < ni π (1) − π (￿K￿ + 1) . 2

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability Conditions
The worst case deviation occurs where the firm with the fewest markets deviates by entering all markets belonging to a subset of rival firms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i}, ￿
￿ 1 ￿ ∗ ∗ nj π (2) < ni π (1) − π (￿K￿ + 1) . 2

K⊆I\{i}

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

δ≥δ

PR

= max
i∈I ￿

max ￿

nj π (2) ￿ ￿ ￿ ∗ (1) − π ∗ (￿K￿ + 1) − ni π nj π ∗ (2) j∈K
j∈K ￿

∗ ￿￿

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Robustness

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Robustness

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

δM L

nj π ∗ (2) j￿=i ￿ ￿ ￿ = max ∗ (1) − π ∗ (I) − i∈I ni π nj π ∗ (I) j￿=i ￿ ￿ ￿

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Robustness

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

δM L

nj π ∗ (2) j￿=i ￿ ￿ ￿ = max ∗ (1) − π ∗ (I) − i∈I ni π nj π ∗ (I) j￿=i ￿ ￿ ￿ ￿ ￿

￿

δ HH = δ P R

nj π ∗ (2) j￿=i ￿ ￿ ￿ ≥ max ∗ (1) − π ∗ (I) − i∈I ni π nj π ∗ (2) j￿=i

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Uncertainty and Tit-for-Tat Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Uncertainty and Tit-for-Tat Enforcement
Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that firms condition their play on the observed signal even when they know it to be false.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Uncertainty and Tit-for-Tat Enforcement
Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that firms condition their play on the observed signal even when they know it to be false. The expected cost to firms of a false signal is highest under multilateral enforcement and lowest under proportional response enforcement. It follows that proportional response enforcement is payoff dominant.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Uncertainty and Tit-for-Tat Enforcement
Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that firms condition their play on the observed signal even when they know it to be false. The expected cost to firms of a false signal is highest under multilateral enforcement and lowest under proportional response enforcement. It follows that proportional response enforcement is payoff dominant. Nevertheless, multilateral enforcement may be stable where proportional response enforcement is not.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Uncertainty and Tit-for-Tat Enforcement
Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that firms condition their play on the observed signal even when they know it to be false. The expected cost to firms of a false signal is highest under multilateral enforcement and lowest under proportional response enforcement. It follows that proportional response enforcement is payoff dominant. Nevertheless, multilateral enforcement may be stable where proportional response enforcement is not. (Caveat: It is possible to design perverse systems of uncertainty where these results do not hold.)
Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Uncertainty may be less of a factor at the extensive margin as participation decisions are often easier to verify than strategic actions within a market.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Uncertainty may be less of a factor at the extensive margin as participation decisions are often easier to verify than strategic actions within a market. Markov perfect collusion may survive changes in firm management or ownership that have the effect of erasing the history of the game.

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Uncertainty may be less of a factor at the extensive margin as participation decisions are often easier to verify than strategic actions within a market. Markov perfect collusion may survive changes in firm management or ownership that have the effect of erasing the history of the game. Collusion at the extensive margin can be facilitated by a smaller group of agents than multi-market collusion.
Collusion at the Extensive Margin
Monday, 10 May 2010

Management Complicity in Multi-Market Collusion

Monday, 10 May 2010

Management Complicity in Multi-Market Collusion

Firm Level

Monday, 10 May 2010

Management Complicity in Multi-Market Collusion

Firm Level

Vic

Tas

Qld

NT

WA

NSW

SA

Monday, 10 May 2010

Management Complicity in Extensive Margin Collusion
Firm Level

WA

NSW

SA

Monday, 10 May 2010

Management Complicity in Extensive Margin Collusion
Firm Level

WA Monopoly

NSW

SA Monopoly

Monday, 10 May 2010

Management Complicity in Extensive Margin Collusion
Firm Level

WA Monopoly

NSW Competitive

SA Monopoly

Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission.

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the firm capable of contesting the market?

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the firm capable of contesting the market? Would contesting the market be profitable?

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the firm capable of contesting the market? Would contesting the market be profitable? Collusion at the extensive margin does not necessarily imply cooperation between firms. This model can be interpreted as a model of standoffs (such as the cold war).

Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the firm capable of contesting the market? Would contesting the market be profitable? Collusion at the extensive margin does not necessarily imply cooperation between firms. This model can be interpreted as a model of standoffs (such as the cold war). Collusion may occur in places we would not usually think to look.

Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Beer or Soft Drink Market

Monday, 10 May 2010

Beer or Soft Drink Market

Retail Sales

Monday, 10 May 2010

Beer or Soft Drink Market

Restaurant Chain A Restaurant Chain B

Retail Sales
Restaurant Chain C

Monday, 10 May 2010

Beer or Soft Drink Market

Restaurant Chain A Bar A Bar B Restaurant Chain B

Retail Sales
Restaurant Chain C

Monday, 10 May 2010

Beer or Soft Drink Market

Restaurant Chain A Bar A Bar B
Sports Ground

Restaurant Chain B

Retail Sales
Restaurant Chain C
Entertainment Venue

Monday, 10 May 2010

Beer or Soft Drink Market
Vending Machine Location B

Restaurant Chain A Bar A Bar B
Sports Ground

Vending Machine Location C

Restaurant Chain B

Retail Sales
Vending Machine Location A

Restaurant Chain C
Entertainment Venue
Monday, 10 May 2010

Beer or Soft Drink Market
Vending Machine Location B Convenience Store A

Restaurant Chain A Bar A Bar B
Sports Ground

Vending Machine Location C

Restaurant Chain B

Retail Sales
Convenience Store B Vending Machine Location A

Restaurant Chain C
Entertainment Venue
Monday, 10 May 2010

Collusive Fringe
Firm 1
Convenience Store A Vending Machine Location B Vending Machine Location C

Firm 2

Restaurant Chain A Bar A Bar B
Convenience Store B

Contested

Retail Sales

Restaurant Chain B

Vending Machine Location A

Sports Ground

Restaurant Chain C
Entertainment Venue

Monday, 10 May 2010

Google and the Partitioning of Product Markets

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Google and the Partitioning of Product Markets
Google has achieved a dominant position in search based advertising.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Google and the Partitioning of Product Markets
Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival firms entering (or expanding their presence within) Google’s core market.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Google and the Partitioning of Product Markets
Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival firms entering (or expanding their presence within) Google’s core market. Google’s entry into office applications and operating systems was followed by Microsoft’s development of the Bing search engine.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Google and the Partitioning of Product Markets
Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival firms entering (or expanding their presence within) Google’s core market. Google’s entry into office applications and operating systems was followed by Microsoft’s development of the Bing search engine. Entry into the mobile device space was followed by Apple’s acquisition of Quattro Wireless.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Google and the Partitioning of Product Markets
Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival firms entering (or expanding their presence within) Google’s core market. Google’s entry into office applications and operating systems was followed by Microsoft’s development of the Bing search engine. Entry into the mobile device space was followed by Apple’s acquisition of Quattro Wireless.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Predatory Entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Predatory Entry
Suppose that the expansion incentive did not hold.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Predatory Entry
Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Predatory Entry
Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Predatory Entry
Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective. Suppose Firm 1 has the natural monopoly market while Firm 2 has the duopoly market.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Predatory Entry
Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective. Suppose Firm 1 has the natural monopoly market while Firm 2 has the duopoly market. If Firm 1 enters 2’s market, Firm 2 will need to use a temporary punishment. That punishment implies price below cost.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Predatory Entry
Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective. Suppose Firm 1 has the natural monopoly market while Firm 2 has the duopoly market. If Firm 1 enters 2’s market, Firm 2 will need to use a temporary punishment. That punishment implies price below cost. Thus, enforcement requires predatory entry to induce exit from another market.
Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Mergers

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric firms; merger reduces cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric firms; merger reduces cartel stability Merger has no effect on collusive profits or the incentive to deviate

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric firms; merger reduces cartel stability Merger has no effect on collusive profits or the incentive to deviate Merger increases profits when there is multi-lateral entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric firms; merger reduces cartel stability Merger has no effect on collusive profits or the incentive to deviate Merger increases profits when there is multi-lateral entry Case 2: Merger between two smallest firms can increase cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric firms; merger reduces cartel stability Merger has no effect on collusive profits or the incentive to deviate Merger increases profits when there is multi-lateral entry Case 2: Merger between two smallest firms can increase cartel stability Merger increases stake in collusion and reduces incentive to deviate

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric firms; merger reduces cartel stability Merger has no effect on collusive profits or the incentive to deviate Merger increases profits when there is multi-lateral entry Case 2: Merger between two smallest firms can increase cartel stability Merger increases stake in collusion and reduces incentive to deviate but ... still increases profits when there is multi-lateral entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Mergers
Mergers when firms are colluding at the intensive margin can increase cartel stability Mergers when firms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric firms; merger reduces cartel stability Merger has no effect on collusive profits or the incentive to deviate Merger increases profits when there is multi-lateral entry Case 2: Merger between two smallest firms can increase cartel stability Merger increases stake in collusion and reduces incentive to deviate but ... still increases profits when there is multi-lateral entry In general, balance between the fact that the reduction in firm numbers reduces the severity of punishments that can be put in place against the reduction in the incentive to deviate that comes from consolidation.
Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Conclusions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection Future directions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection Future directions Relational contracting

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin
Monday, 10 May 2010

Introduction

Conclusions
Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection Future directions Relational contracting Trade agreements

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010